August 2025*
Global equities have been resilient in 2025, despite geopolitical and trade shocks. Although near-term risks persist amid weakening US data, our base case assumes a recession will be avoided, supported by AI-driven investment and policy easing. We foresee a ‘quasi-Goldilocks’ environment characterised by moderate growth, stable (though elevated) inflation, and more accommodative monetary policy. Fed cuts, global central bank easing, and a weaker US dollar create a favourable backdrop for risk assets. We remain overweight non-US equities.
Global equities have trended higher this year (ACWI +11% year-to-date), despite several shocks, including a sharp rise in US tariffs and a military conflict in Iran. Some short-term caution may still be warranted as US economic data shows signs of weakness. The July US nonfarm payrolls report recorded below-trend job growth of seventy-three thousand, along with material downward revisions to the two previous months. However, if the US avoids a recession this year (our base case), the investment environment favours further strength in global equities.
Our baseline expectation has shifted more positively to a ‘quasi-Goldilocks’ environment for the second half of the year and early 2026. ‘Goldilocks’ is typically described as steady economic growth that is neither too hot nor too cold – i.e., a recession is avoided, and inflation remains stable. Stocks can perform well as financial conditions ease and earnings grow. Currently, US growth is downshifting (see chart 1) and will likely remain below trend in the second half of the year as tariffs, immigration restrictions, and slowing consumption weigh on activity. Still, AI-related investment added around 1% point to growth in the first half of the year (see chart 2) and potential positive impacts from deregulation and the One Big Beautiful Bill (OBBB) provide some offset.
We use the term ‘quasi-Goldilocks’ because inflation is elevated; however, the current trend is not sharply accelerating in response to tariffs. Chart 3 shows a clear rise in goods inflation, based on the increase in core goods prices, indicating that tariffs are impacting prices. There is a risk that prices continue rising this year if further costs are passed on to consumers. On the flip side, services prices show a more benign inflation trend, potentially allowing the Fed to shift focus to its maximum employment mandate.
The market narrative is likely to be centred around the Fed and global central banks in September. Weakening US data is providing a stronger case for a resumption of the Fed’s cutting cycle. Two FOMC members have already dissented in favour of cuts and Governor Kugler’s replacement should add a third dove to the FOMC and potentially a ‘shadow Chair’. At the current 4.50% policy rate, the Fed has room to react to weaker data. Furthermore, approximately seven trillion dollars is parked in money market funds earning roughly 4% returns, which could be reallocated to duration, equities, or other assets (e.g., hard assets or alternatives) as short-term rates decline. Additionally, a large portion of non-US central banks are either cutting or expected to cut rates this year (see chart 4). Overall, the global monetary backdrop is becoming more supportive for financial assets.
While some risks remain, we observe that elevated global policy uncertainty is declining (see chart 5), and the OBBB passed without triggering a major bond market revolt. US fiscal risks are unresolved over the longer term, as US debt levels rise, but an immediate catalyst for a sharp rise in yields is less obvious. Also, the US dollar is weakening (-6% YTD, based on the Fed’s nominal trade-weighted index), and financial conditions are easing (Chicago Fed Financial Conditions index is at its lowest level since 2021, at -0.57). Finally, global earnings revisions have bottomed and turned marginally positive in recent weeks following negative revisions earlier in the year.
| Chg | -2 | -1 | 0 | +1 | +2 | |
|---|---|---|---|---|---|---|
| US | – | |||||
| Canada | – | |||||
| Eurozone | – | |||||
| Switzerland | – | |||||
| UK | – | |||||
| Japan | – | |||||
| Australia | – | |||||
| EM | – |
| Chg | -2 | -1 | 0 | +1 | +2 | |
|---|---|---|---|---|---|---|
| Canada | – | |||||
| Eurozone | – | |||||
| Switzerland | – | |||||
| UK | – | |||||
| Japan | – | |||||
| Australia | – | |||||
| EM | – |
*This publication reflects asset performance up to 31 July 2025, and macro events and data releases up to 6 August 2025, unless indicated otherwise.
The information contained herein is obtained from sources believed by City of London Investment Management Company Limited to be accurate and reliable. No responsibility can be accepted under any circumstances for errors of fact or omission. Any forward looking statements or forecasts are based on assumptions and actual results may vary from any such statements or forecasts.